Support Financial Services with measurement & monitoring

Financed emissions

The Partnership for Carbon Accounting Financials (PCAF) is a global, industry-led initiative to develop greenhouse gas accounting standards and tools for the financial sector. It looks to expand on the GHGP Scope 3, Category 15: Investments, providing a framework for measuring, monitoring and disclosing financed emissions. It is a voluntary, consent-by-participation framework. Founded in 2015 by a group of Dutch financial institutions, it now has over 300 members globally including banks, investors, insurers and government bodies. 

PCAF was initially released with six asset classes:

	Listed equity and corporate bonds Calculates emissions based on portfolio share in the company.
	Business loans and unlisted equity Attributes emissions based on the outstanding loan/investment amount compared to the company's total equity and debt.
	Project finance Accounts for emissions from specific projects that are financed.
	Commercial real estate Measures emissions from energy use in commercial buildings based on the investment share.
	Mortgages Captures emissions from energy use in residential real estate based on the outstanding loan amount.
	Motor vehicle loans Calculates emissions from vehicles' fuel combustion based on the financier's outstanding loan amount

Data quality scores

Accompanying the macro simplistic calculations are data quality principles inherent in financial accounting to support a user of the data sets understanding of the value. There were 5 data quality scores to assess the quality and accuracy of emissions data used for financed emissions calculations:

Score 1 (highest quality)

• Actual emissions data from the company/borrower obtained through direct disclosure or audited reports
• Represents the most accurate primary data source

Score 2

• Estimated emissions using asset company-specific emissions data such as energy consumption data
• Provides high accuracy by using company metrics applied to appropriate emission factors

Score 3

• Estimated emissions using average data from the same sector with evidence of enhanced quality
• Uses sector emissions intensities or benchmarks of higher contextual relativity

Score 4

• Estimated emissions using relatively broad sector emission intensities or benchmarks
• Data is more generic sector/industry averages when specific data is unavailable

Score 5 (lowest quality):

• Estimated emissions using crude approximations with very limited evidence
• Represents a last resort data quality score based on simple emissions proxies

PCAF recommends financial institutions strive to maximise use of higher data quality scores 1-3. Lower scores 4-5 should only be used when higher quality data cannot be obtained.

The ability to apportion a GHG emissions value for an underlying holding is easier for direct investors (such as a private equity portfolio). This rule of thumb also applies where large debt or equity instruments are issued by global and national banks or asset managers. However, self-reported data remains challenging, and the role of audit in supporting organisations evolve and mature their GHG reporting is now critical. The CSRD and SEC regulatory developments will likely improve this transparency and accountability, which in turn will support financial services firms.

PCAF have subsequently released methodologies for facilitated and insurance-associated emissions. At Rio, we believe that enterprise grade reporting of GHG emissions has to mature using the GHGP before those methods can have tangible impact for those financial services firms.

Due diligence

The use of sustainability expertise during deal cycles has existed for decades. Investment committees rely on the findings of manually prepared research conducted by responsible investment or sustainability divisions (in-house or consultants) to understand the sustainability score of a business.

This typically supports with:

• Evaluating environmental compliance, liabilities and impacts
• Assessing carbon footprint, energy/water usage and waste management
• Analysing physical climate risks like extreme weather events
• Reviewing environmental policies, certifications and management systems
• Assessing labor practices - working conditions, diversity and human rights
• Evaluating health, safety and community impacts
• Reviewing product responsibility and consumer data protection
• Analysing human capital management and talent retention
• Evaluating board composition, executive compensation and accountability
• Reviewing business ethics, anti-corruption and whistleblower policies
• Assessing sustainability risk and opportunity oversight processes
• Analysing lobbying activities and political contributions

Assessments are conducted through:

• Data gathering through surveys, site visits, interviews and audits
• Benchmarking against industry standards, regulations and best practices
• Identifying red flags and areas requiring further investigation

We have been providing Rio as an intelligent sustainability assistant to help transition evaluations of a target (pre and post acquisition) from manually (once per month on average) to automated (four per week). This is supporting deal teams readily understand the maturity of sustainability management and analysis of performance.

Product labelling

Greenwashing continues to represent a risk to genuine, scientifically verifiable, taxonomy aligned sustainable investment products.The EU and UK are leading, large financial markets which have designed SFDR and SDR as clear mechanisms to challenge the integrity of sustainability claims made by financial products.

The regulations require reporting of performance at the company and fund level. These require aggregated disclosure of individual sustainability KPIs, covering environmental and social subject matters.

We work with customers across the financial services sector to support with product labelling and surveying of individual assets’ sustainability performance. These quantitative and qualitative reporting mechanisms are grounded in the regulatory requirements of multiple jurisdictions. Our platform can support with measuring and reporting performance, providing audit grade disclosure.